How Indirect Sourcing Drives Strategic Value in Procurement

Key takeaways:

• Indirect spend is a major, often overlooked cost center with high savings potential: Categories such as SaaS are rife with inefficiencies (66% of apps are unused or underutilized), and prone to both maverick spend and rising costs (software inflation currently sits at 11.3%), making strategic oversight crucial.
• A centralized, data-driven approach can unlock substantial value: Standardizing procurement processes, using spend analytics, and focusing on long-term value helps reduce waste, improve contract terms, and maximize ROI.
• Measuring and managing indirect sourcing is essential for impact: Tracking KPIs like negotiated savings, supplier consolidation, and maverick spend reduction enables procurement teams to demonstrate tangible business value and reduce risk.

While indirect sourcing covers a range of goods and services that aren’t necessarily deemed strategic or business-critical, some indirect spend categories hold significant untapped value.

Take SaaS, for example. Not only does it account for 12.5% of total expenditure within the average organization, it is also prone to steep annual price hikes and is notorious for inefficiencies – 66% of all applications go unused or underutilized.  

Treating indirect procurement as an afterthought isn’t just a critical oversight, it’s a missed opportunity to unlock substantial value within procurement.

In this article, we not only dive into what indirect sourcing consists of, but also the specific opportunities it presents as a strategic lever, along with the key metrics that can be tracked and measured to demonstrate impact.

What is indirect sourcing – and how does it differ from direct sourcing?

By definition, indirect sourcing refers to the procurement of goods and services that are not directly used in the production of a company’s core product offering, but rather support day-to-day business operations – office supplies, software, travel purchases, and consulting services, to name a few examples.

This contrasts with direct sourcing, which involves the procurement of materials and components used within the final product.

Given its direct link to a company’s bottom line, direct sourcing naturally takes center stage, with the procurement of these goods almost always subject to rigorous oversight and continuous cost optimization. The same can’t necessarily be said for indirect procurement.

The problem is, this oversight comes at a cost – particularly in SaaS where 90% of companies overpay for their applications, often with unfavorable terms, and in many instances, for tools that either aren’t being fully utilized or are entirely unused.

Why indirect sourcing deserves strategic focus

Not only does indirect spend account for a significant portion of total organizational expenditure, but costs in most indirect spend categories are rising year-on-year – software inflation alone now stands at 11.3%, substantially higher than general market inflation.

This isn’t the only reason to focus on indirect sourcing, though:

• Indirect goods or services are often procured without approval, leading to uncontrolled spend and subsequent wastage.
• Indirect sourcing categories are full of untapped savings potential, often due to fragmented processes, limited usage insights, and a lack of negotiated terms.
• Lack of governance and oversight expose companies to avoidable risks, including data breaches, contractual breaches, or compliance failures.

The only way to mitigate these issues and unlock long-term value is by taking a more strategic, centralized approach to indirect sourcing.

In fact, by implementing a structured, data-driven procurement strategy for indirect goods and services, you can:

• Reduce wasted spend by eliminating maverick purchasing and ensuring alignment with procurement policies
• Gain greater cost control with better visibility into usage, contracts, and supplier performance
• Uncover immediate and long-term cost savings opportunities
• Leverage data in negotiations, securing better pricing and terms on each contract
• Bring tail spend and long-tail spend management under control, turning what is often an overlooked area of spending into a source of value
• Maximize ROI on indirect spend by aligning investments with actual business needs and usage requirements
• Demonstrate procurement’s impact across the organization by delivering measurable savings, reducing risk, and enabling more informed decision-making

Indirect sourcing strategies

To modernize your indirect sourcing process and turn procurement into a value-generating function, consider taking the following steps:

1. Centralize and standardize your indirect sourcing process

One of the biggest challenges for any procurement team is fragmented purchasing – a problem not only contributing to shadow IT and vendor lock-in, but also driving high levels of underutilization and shelfware, and subsequently vast amounts of wasted spend.

By developing clear, standardized processes from intake-to-procure, including purchase requisition and approvals, procurement teams can mitigate these risks and achieve far greater spend visibility across the entire organization.

2. Lean on spend analytics, usage insights, and benchmarking data

When it comes to indirect sourcing, intel in the form of spend analytics, usage insights, and benchmarking data is powerful.

Or, at the very least, it’s leverage that can help you make more informed, data-driven procurement decisions that drive business value.

Here are some of the specific things you can uncover with the right intel:

• The duplicate and redundant tools and licenses contributing to wasted spend
• Whether you’re overspending on software and if so, by how much
• Whether you’re getting the best possible contract terms
• Bottlenecks in your approval processes
• Instances of shadow IT

With this insight, you can make decisions on whether to consolidate, amend, or terminate your contracts at the point of renewal.

3. Shift the focus from cost to value

Make indirect sourcing a value-generating function by looking beyond solely cost savings and considering long-term strategic outcomes. This includes:

• Future-proofing – Build flexibility and growth plans into your contracts to ensure they’re scaling with the evolving needs of your organization. This could include agreeing on pre-negotiated pricing bands for future users.
• Mitigating risks – Anticipate potential risks and outline measures to minimize or address them before they become an issue. As an example, define clear SLAs, establish dispute resolution mechanisms, and include an exit clause in all contracts, specifying the conditions you can terminate the contract early.

• Diversifying your supplier base – Avoid some of the more obvious procurement risks by building supply chain resilience, reducing supplier dependency, gaining access to new innovations, and even aligning procurement with ESG initiatives.
• Considering total cost of ownership (TCO) – Evaluate long-term costs and benefits rather than focusing solely on any initial discounts you might have secured. This ensures that the purchasing decisions your team makes are delivering greater overall value throughout the entire lifecycle of each product and service. ‍
• Improving efficiency – By streamlining your procurement cycles, you free up valuable resources to focus on more strategic initiatives.

See how Vertice helped one company accelerate their procurement cycle by 55%

4. Renegotiate contracts

Contract renegotiations provide the perfect opportunity to optimize terms, build flexibility into contracts, and drive down costs – the latter of which is crucial given how software prices continue to rise 11.3% each year.

While we would always recommend using vendor pricing benchmarks, spend analytics, and utilization data to strengthen your negotiation position, some of the specific terms you should be negotiating on to reduce risks and drive value from your contracts include:

• Service level agreements (SLAs)
• Data ownership, security, and portability
• Exit clause
• Break clause
• Price uplifts
• Overages
• Payment terms

We’d also recommend that you request the renewal of any auto-renewal clauses.

Measure indirect sourcing performance

It’s not enough to simply drive improvements across your indirect sourcing process, you also need to be demonstrating these successes.

This relies on tracking the right KPIs and procurement metrics. These include:

• Negotiated discounts
• Supplier consolidation
• Supplier compliance rates
• Maverick spend reductions
• Spend under management

Invest in an industry-leading procurement provider such as Vertice

While taking a strategic approach to indirect sourcing can provide huge benefits in the form of cost savings, risk mitigation, and efficiency gains, the level of rigor and analysis that is needed requires time.

Time that many procurement teams simply don’t have.

As a procurement orchestration platform, Vertice not only provides the capabilities to track, analyze, and streamline indirect procurement, but we also act as a strategic partner, flagging cost-saving opportunities and inefficiencies within your processes, while negotiating contracts on your behalf.

See how we saved one company 115 hours on negotiations within just three months, while saving ClearScore as much as $2.6 million on a single contract.

Alternatively, take a look at the platform yourself with a self-guided tour and better understand how it can support you in managing your indirect spend.